Are social networking sites such as Facebook, LinkedIn, Google+, and Twitter “information monopolies” that should be regulated as public utilities? Some people seem to think so. Treating these digital services like the equivalent of a local sewage company would be a disaster for consumers, however, because public utility regulation is the arch-enemy of innovation and competition.
A columnist at SAI Business Insider argued this week that “social networks are a critical layer of infrastructure for a wide variety of applications and content” and claimed lock-in might occur without “social network neutrality.” Others have labeled Facebook a public utility and suggested regulation may be needed. And plenty of people are lining up to declare Google a utility. Those calls may increase with the recent successful launch of its new Google+ social networking service.
We could be headed for a day when the worst regulatory ideas of the past century — public utility mandates, common carriage restrictions, “neutrality” rules, price controls, and the Fairness Doctrine — are applied to the Internet and digital platforms. Sadly, few seem to remember how those ideas wreaked havoc on earlier communications and media technologies.
Much of this recent angst over the growing scale of some social networking sites has been prompted by the work of influential Columbia Law School professor Tim Wu, about whom I’ve written about here before. Wu’s recent book, The Master Switch: The Rise and Fall of Information Empires, and essays like “In the Grip of the New Monopolists” have been drawing attention and winning converts in cyberlaw classrooms and Internet policy circles.
Wu was named a senior advisor to the Federal Trade Commission earlier this year and it might not be a coincidence that the agency recently announced an investigation of Twitter’s business practices in addition to pursuing Google. Twitter and Google are two of the many companies that Wu labels an “information monopoly” or “information empire.”
There are several problems with declaring social networking services to be utilities and converting them into regulated monopolies.
First, a utility is typically considered an “essential facility” that has no good alternatives. Local sewage and water systems are the classic examples. Social networking sites are in a different league and would hardly be considered essential services.
The breakneck pace of change in the social networking sector makes these sites distinct from utilities. Not only are most of these cyber-services relatively new, but they keep displacing each other. A dozen years ago, AOL, AltaVista, CompuServe, and Prodigy ruled the online world, only to see their early leads evaporate rapidly. And just five years ago, it was Friendster and MySpace that were on everyone’s lips, but they too have faded quickly from the spotlight. Rupert Murdoch and News Corp. paid $580 million MySpace in 2005 only to sell it for $35 million last month. So much for “information empires.”
New alternatives come from unexpected quarters. Just this week, myYearbook, a social networking site started five years ago by two high school-aged siblings, sold for $100 million. It already has 20 million members.
Second, there’s the problem of “regulated monopoly” becoming a self-fulfilling prophecy. Critics apparently don’t see the irony of classifying all these services as regulated monopolies when they all compete so vigorously against each other. That’s not the case in typical utility sectors. The very act of imposing “utility” status on a service or platform tends to shelter it from competition and lock them in as real monopolies for the long-haul.
Third, public utilities are, by their very nature, non-innovative. Consumers are typically given access to a plain vanilla service at a “fair” rate, but without any incentive to earn a greater return, innovations suffers. Of course, social networking sites are already available to everyone for free! And they are constantly innovating. So, it’s unclear what the problem is here and how regulation would solve it.
That raises the biggest danger of government intervention. Regulation could have a very direct cost for consumers in this case. If these social networking services were classified as utilities and government regulated their data collection practices or advertising-based business models, prices could be imposed for the first time as sites struggle to adjust to new rules.
This debate comes down to a classic conflict of visions between the static versus dynamic competition mindsets. Those who take static snapshots of markets are bound to see big bad bogeymen around every cyber-corner. By contrast, a dynamic view of market economies — especially markets built on code — appreciates how Schumpeter’s “perennial gales of creative destruction” continue to roll through the digital economy. Digital Davids are constantly displacing cyber-Goliaths.
Hopefully, for the sake of consumers and competition, policymakers won’t listen to the fussbudgets who so casually affix public utility labels to today’s dynamic social networking platforms. It would be the death of Internet innovation if they got their way.
writer @ Adam Thierer